China's Economy Facts and Effect on the U.S. Economy

How Much China Really Affects the U.S. Economy

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A teller counts Chinese Yuan banknotes at a bank in Shanghai, China, on February 1, 2008. The Chinese Yuan is known locally as the RMB, or renminbi, which means 'the money of the people'.
Photo by Lucas Schifres/Pictobank/Getty Images

China has 1.38 billion people, more than any other country in the world. China is still a relatively poor country in terms of its standard of living. Its economy only produces $16,600 per person, compared to the U.S. GDP per capita of $59,500.

The low standard of living allows companies in China to pay their workers less than American workers. That makes products cheaper, which lures overseas manufacturers to outsource jobs to China. They then ship the finished goods to the United States, China’s largest trading partner.

Components of China's Economy

China built its economic growth on low-cost exports of machinery and equipment. Massive government spending went into state-owned companies to fuel those exports. These state-owned companies are less profitable than private firms. They return only 4.9 percent on assets compared to 13.2 percent for private companies.

These companies dominate their industries. They include the big three energy companies: PetroChina, Sinopec and China National Offshore Oil Corporation.

China developed cities around these factories to attract workers. As a result, one-fourth of China's economy is in real estate.

The government also funded construction of railways and other infrastructure to support growth. As a result, it imported massive amounts of commodities, like aluminum and copper.

By 2013, the 10 percent annual growth threatened to become a bubble. That's when China looked toward economic reform.

China's Exports

China regained its position as the world's largest exporter in 2017, when it exported $2.2 trillion of its production.

The EU briefly took the No. 1 spot in 2016. It now is second, exporting $1.9 trillion. The United States is third, exporting $1.6 trillion.

China shipped 18 percent of its exports to the United States in 2017. That contributed to a $375 billion trade deficit. China's trade with Hong Kong was almost as much (14 percent). Its trade with Japan (6 percent) and South Korea (4.5 percent) was much less.

China encouraged trade with African nations, investing in their infrastructure in return for oil. It increased trade agreements with Southeast Asian nations and many Latin American countries. That's why President Obama launched the Trans-Pacific Partnership trade agreement. It doesn't include China. One of its goals was to balance China's growing power in the region. In January 2017, President Trump withdrew from the TPP. But the other countries have continued with it on their own.

China does a lot of manufacturing for foreign businesses, including U.S. companies. They ship raw materials to China. Factory workers build the final products and ship them back to the United States. In this way, a lot of China's so-called "exports" are technically American products.

China primarily exports electrical equipment and other types of machinery.

This includes computers and data processing equipment as well as optical and medical equipment. It also exports apparel, fabric, and textiles. It's the world's largest exporter of steel.

China's Imports

China is the world's second largest importer. In 2017, it imported $1.7 trillion. The United States, the world's largest, imported $2.3 trillion. China imports raw commodities from Latin America and Africa. These include oil and other fuels, metal ores, plastics, and organic chemicals. It's the world's largest importer of aluminum and copper.

China’s commodity consumption has fueled a world-wide boom in mining and agriculture. Unfortunately, suppliers over-produced, creating too much supply. As a result, prices cratered in 2015. As China's growth slows, prices for commodities used in manufacturing, such as metals, will drop.

China buys U.S. debt to support the value of the dollar. This is because China pegs its currency (the yuan) to the U.S. dollar. It devalues the currency when needed to keep its export prices competitive.

China's role as America's largest banker gives it leverage. For example, China threatens to sell part of its holdings whenever the United States pressures it to raise the yuan's value. Since 2005, China raised the yuan's value by 33 percent against the dollar. Between 2014 and 2016, the dollar's strength increased by 25 percent. The rise forced China to devalue the yuan. This ensured its exports would remain competitively priced with those from Asian countries that hadn't tied their currency to the dollar.

These accusations are nothing new. In 2007, the Commerce Department threatened to apply penalty tariffs to Chinese products. For example, it accused China of dumping its paper exports into the United States. The Commerce Department claimed that China unfairly provided subsidies of 10-20 percent to its manufacturers of glossy paper used in books and magazines. Trade volume had grown 177 percent in one year. The U.S.-based New Page Corporation brought the anti-dumping case to the Commerce Department. It said it could not compete against subsidized prices.

The government's emphasis on job creation left little funding for social welfare programs. As a result, the Chinese population was forced to save for retirement. They didn’t spend, strangling domestic demand. Without robust consumer spending, China was forced to rely on exports to fuel growth.

Most of the growth occurred in the cities along China's east coast. These urban areas attracted 250 million migrant workers from the countryside. Chinese leaders must continue to create jobs for all these workers or face unrest. They remember Mao's Revolution all too well. The government must provide more social services, allowing workers to save less and spend more. Only an increase in domestic demand will enable China to become less reliant on exports.

In addition, leaders must crack down on local corruption. They must find ways to improve the environmental impact of industrialization. Leaders have embarked on an ambitious nuclear and alternative energy program to reduce reliance on dirty coal and imported oil. China signed the Paris Climate Accord. All of these measures are part of China's economic reform.

China Avoided the Great Recession

During the financial crisis of 2008, China pledged 4 trillion yuan, about $580 billion, to stimulate its economy to avoid the recession. The funds represented 20 percent of China's annual economic output. It went towards low-rent housing, infrastructure in rural areas, and construction of roads, railways, and airports.

China also increased tax deductions for machinery, saving businesses 120 billion yuan. China raised both subsidies and grain prices for farmers, as well as allowances for low-income urban dwellers. Its central bank also dropped interest rates three times in two months.

Shanghai Cooperation Organization

The Shanghai Cooperation Organization is a central Asian military alliance that combats terrorism and drug trafficking while supporting free trade agreements. Its members share intelligence and combine military operations to counter both terrorism and cyber-terrorism. It is China's version of NATO, the North Atlantic Treaty Organization.

Its members are China, Russia, and the countries along their borders. These are Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. In June 2016, India and Pakistan were accepted as members. The group represents nearly half of the world's population. It also now have four members (Russia, China, India, and Pakistan) who have nuclear weapons.

For that reason, most nearby countries also participate. They can be either observers, dialogue partners, or guest attendance. Observers are in the process of becoming full members. They include Afghanistan, Belarus, Iran and Mongolia. The six Dialogue Partners share goals but don't want to become members . They are Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka, and Turkey. The Guest Attendees participate in the summits. Their members include ASEAN, CIS, and Turkmenistan.